The government is examining a proposal to allow ?Indian? foreign institutional investors (FIIs) registered overseas to open sub-accounts for non-resident Indians (NRIs). At present, NRIs can invest in Indian markets only through portfolio investment schemes offered by designated bank branches.
According to an informed government source, FIIs will have to furnish complete details of the ultimate sub-account beneficiaries and will be held responsible for any breach of norms by NRI investors.
Indian financial institutions that have set up shop abroad as FIIs will benefit once the government liberalises the definition of sub-accounts. The finance ministry mooted attracting these investors via Indian FIIs. The strategy is to encourage foreign investment through a transparent route.
The ministry will formalise this proposal after discussing it with the Securities & Exchange Board of India and Reserve Bank of India. Allowing FIIs to open sub-accounts for NRIs would require changes in the Foreign Exchange Management Act, the source said. Sebi regulations related to FIIs may also need to be tweaked. The department of economic affairs under the finance ministry is expected to discuss the proposal with the two regulators shortly.
If NRIs are allowed to invest through this route, they may be able to pick up a larger share in listed companies. At present, while FIIs are allowed to hold stakes up to sectoral limits, NRI investments are capped at 24%.
Further, some sections in government suspect NRIs of covertly investing in Indian equities by subscribing to participatory notes (PNs) issued by non-Indian FII sub-accounts. PNs are derivatives issued against an underlying security, generally shares. FIIs registered in India issue PNs to overseas clients who may not be eligible to invest here directly.
While PNs increase the pool of funds available to FIIs, holders gain from the appreciation of underlying shares. Sub-accounts, on the other hand, are small accounts managed by FIIs registered with Sebi on behalf of foreign institutions, corporates and funds in return for a fee. The rise in PNs has raised concerns that they could be used for money laundering. Officials also reckon that many domestic shareholders may be using this channel to corner shares in Indian companies. RBI has long argued against the issue of PNs.